Analysts Cut Q1 Earnings Expectations Despite Rising Markets

Analysts cut earnings estimates by a larger margin than average in the first quarter as a bank liquidity crisis added to concern about a looming recession.

The bottom-up Q1 EPS estimate-an aggregation of median forecasts for each company in the S&P 500 Index-dropped 6.3%, to $50.75. Analysts have lowered quarterly earnings estimates by an average of 2.8% over the last five years and 3.8% over the past 20 years. Almost 75% of the first quarter earnings guidance offered by S&P 500 companies has been negative.

The phenomenon isn't only for S&P 500 companies. Analysts have also lowered estimates for the MSCI USA Index and the MSCI ACWI over the same period. Likewise, analysts also cut S&P 500 EPS estimates for all of 2023 by 3.8%, a wider margin than the 5-, 10-, 15-, and 20-year averages.

The sudden failures of Signature Bank and Silicon Valley Bank prompted broad concern about liquidity, on top of risks posed by inflation and a potential recession. Widespread pessimism in earnings outlooks could also be due to expected poor performance by the materials, healthcare, information technology, and communication services sectors.

Analysts have lowered their estimates for 79% of materials sector stocks, with a predicted earnings decline of 36% sector-wide. The semiconductor industry's earnings are expected to fall 43% from last year. Nonetheless, stocks in both sectors rose over the quarter, with the materials sectors rising 2.1% and the PHLX Semiconductor Sector gaining 27% on enthusiasm around AI spending.

One effect of the shift in predicted EPS is a change to the forward 12-month P/E ratio for the S&P 500, which increased to 17.8 from 16.7 during the first quarter. The price of the index increased at the same time as EPS estimates fell. In the 10 years prior to COVID-19, the index's P/E ratio averaged 15.5.